Integrity Inc.

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Integrity Inc.

1000 Cody Road
Mobile, Alabama 36695
U.S.A.
Telephone: (251) 633-9000
Fax: (251) 633-7324
Web site: http://www.integritymusic.com

Public Company
Incorporated: 1987
Employees: 168
Sales: $51.8 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: ITGR
NAIC: 334612 Prerecorded Compact Disc (Except Software), Tape, and Record Reproducing; 51113 Book Publishers

Integrity Inc., based in Mobile, Alabama, produces, publishes, and distributes Christian music. Its Christian lifestyle products are designed to entertain and educate as well as enhance worship. Integrity produces works in different formats, including cassettes, CDs, videos, DVDs, and print. It offers praise and worship music in different musical styles designed for a range of audiences. Soundscan tracking has identified Integrity as the nation’s leading praise and worship music company, commanding, at the end of 2000, 56 percent of the Christian Bookseller’s Association market. The company, which owns rights to about 2,700 songs, distributes its music and videos in retail stores throughout the United States and 161 countries abroad as well as through sales made directly to consumers via mail order catalogs, the Internet, and continuity clubs. It produces various recordings in an array of languages, including Russian, Spanish, Portuguese, French, German, Mandarin Chinese, and Indonesian. Through its new subsidiary, Integrity Publishers, Inc., the company also produces and publishes Christian books. Although public, Integrity is largely owned by the family of Chairman and CEO P. Michael Coleman, who controls the bulk of the company’s voting stock

1987-92: Integrity Starts Out as Christian Music, Direct Mail Club

Integrity Music Company, the predecessor of Integrity Incorporated, was founded by P. Michael Coleman in Mobile, Alabama in 1987 after he and an investment partner purchased the music operations of Integrity Communications, Inc., then owned by Charles Simpson Ministries, Inc. Before acquiring the business, Coleman had served as the president of various organizations with the Christian communications industry. From the outset, Coleman directed the company’s fortunes as both CEO and president.

Integrity began as a producer of Christian praise and worship music, recorded in a variety of contemporary styles, but it was built on what the company itself termed “a Hosanna! Music mail-order tape program.” According to the company’s Web site, its mission from the outset was to help people all over the world “experience the manifest presence of God.”

Initially, Integrity Music was strictly a Christian music direct mail (CD and tape) club. However, it was the first contemporary Christian music producer to depend on direct marketing techniques, which proved very successful. The company quickly developed a solid customer base that insured its remarkable growth and early entry into new Christian-music market segments. It soon expanded its product line to include young adult and children’s music, videos, and instrumental recordings.

To market its labels, Integrity used direct market strategies. For example, to appeal to a young audience, it developed a popular continuity program called “Just for Kids.” It also printed a full catalog from which customers could order any of Integrity’s CDs and tapes, including its children’s label lines: “The Doughnut Repair Club,” “Kids Sing-A-Long,” and “Songs of Praise.” In addition, starting in 1992, Integrity was represented by Rep Sales, which introduced Integrity’s top country artist, Susie Luchsinger, into the general market.

Integrity also joined up with Word, Inc.’s Everland label to create an in-store, interactive kiosk program, the first of its kind to be placed in Christian bookstores. In addition, encouraged by the results of its marketing efforts, Integrity took “The Doughnut Repair Club” to general markets through direct sales. The line had soon sold over a million units, and its first video in the series went gold very quickly.

1993-97: Integrity’s Entry into the Public Sector

By 1993, Integrity’s sales had climbed to $29.1 million. Prompted by the company’s mercurial rise, and anticipating rapid expansion that would require more working captial, Coleman decided to take Integrity public. After being reincorporated in 1993, the company made its IPO in 1994 and started trading on the NASDAQ exchange.

However, Integrity had a few problems associated with its restructuring and emergence as a public company. In 1996, it laid off 30 of its 145 employees, a necessary belt-tightening measure taken when it experienced lower-than-expected sales. In fact, its revenue fell from $36.3 million in 1995 to $30.4 million in 1996, and in both those years the company had bottom line losses. The slump was of short duration, though, thanks to the successful sale of some key albums, including “Shout to the Lord,” “Let the River Flow,” “Shalom Jerusalem,” and “Jerusalem Arise.” Also, sales improved as a result of a partnership that Integrity had formed with Hillsong Music Australia in 1995. Under its terms, Integrity became the exclusive distributor of that company’s recordings in the United States. Some analysts also gave credit for Integrity’s rebound to COO Jerry Weimer, who joined the company in 1996, and CFO Alison Richardson, both of whom helped the company restructure and pay down its debt.

At the end of 1996, Integrity’s label line included “Integrity Music,” “Hosanna! Music,” “Integrity Music Just-for-Kids,” “Renewal Music,” and “FairHope Records.” It added to the line in 1997, when it inaugurated Vertical Music, a line of church-oriented music produced for the teen and young adult Christian music market. The line represented something of a new direction for Integrity, conjoining as it did praise and worship content with contemporary alternative music.

1998-99: Vertical Music Line, WoW Releases, and Online Store Help Market Performance

The new Vertical Music line helped boost Integrity’s sales and return it to profitability from 1997 to the end of the decade, though it was not until 1998, when it revenues rose to $38.8 million, that the company’s sales climbed above those reached in 1995. By the end of 1998, Integrity commanded first place and a 29 percent market share in CCLFs Top 500 tracking survey.

One of Integrity’s most successful ventures, its WoW double-CD collections, first went into production in 1999. Initially, in 1996, Integrity partnered with EMI Christian Group, Word Entertainment, and Provident Music Group to produce WoW CDs, but it did not actually release any WoW albums until it formed its 1999 partnership with Marantha! Music and Vineyard Music and licensed the WoW trademark from EMI. The WoW albums previously released under other labels had all proved very successful. Each album featured some of the year’s highest ranking worship songs taken from the Top 500 list compiled by Christian Copyright Licensing Inc. (CCLI), which annually tracked the use of such songs in about 112,000 North American churches. Very popular, they all achieved platinum status with sales of over 50,000 units within three months after their release. Their stellar performance attracted Integrity and its new partners. The first of the three WoW albums the companies released, WoW Worship —Today’s 30 Most Powerful Worship Songs, hit the street in June of 1999. It was followed by two more albums in the next two years. The three releases, known within the industry as WoW Worship Blue, WoW Worship Orange, and WoW Worship Green, all were top sellers.

It was also in 1999 that Integrity established a direct sales arrangement with Amazon.com and Crosswalk.com, a Didax Internet site, both of which were already selling Integrity’s music but were getting it from third party distributors. Under the new agreement, Integrity began selling its products directly to the two e-commerce businesses. Moreover, encouraged by the success of Internet marketing, Integrity also established its own online store, www.integritymusic.com. It showed promise almost immediately, and the company soon retained InfoMech, a leading Internet developer, to help it improve and expand the company’s e-commerce capabilities. From the start, www.integritymusic.com used audio and visual streaming to allow customers to sample Integrity’s music and buy its products as well as get information about its artists and worship leaders, appearance itineraries, and scheduled dates for new releases. With InfoMech’s help, the revised site added such features as custom recommendations based on an individual buyer’s purchase history, customer reviews of products, a more efficient and faster order process, and an intelligent search engine for finding products by category, song title, artist, or description.

With its enhancements, www.integritymusic.com placed in the top seven of all e-commerce music sites in an end-of-the-year survey conducted by BizRate.com, an independent, third-party e-commerce research firm. Integrity, the only Christian music company to participate in BizRate’s survey, reached its ranking in competition with such established and successful e-commerce music sites as CDNow, CD Universe, and Tower Records. Coleman noted that the feedback from BizRate’s surveys would be valuable for reaching customers and expanding Integrity’s market, which, as the CEO also noted, had great sales momentum, growing at a good month-to-month clip.

Company Perspectives:

There is one thing we do on earth that we will continue to do in heaven. That is to praise and worship God. That is why we view life on earth, for those who love Jesus, as choir practice for heaven. To say that praise and worship is the most important category of music today is an understatement. In light of that, there is no more important activity of the human heart than to praise and worship God. That is the reason we exist. That is our purpose. That is also the corporate mission of our company.

2000-01: Successful Partnering with Time Life Music

In February 2000, Integrity entered an agreement with Time Life Music to produce Songs 4 Worship, a co-branded series that was eventually slated to grow to 20 volumes. The partnering arrangement linked the world’s leader in praise and worship music with its leading television music marketer. The Songs 4 Worship series was to be modeled after Time Life’s very successful Songs 4 Life series, which, since its introduction in 1998, had already sold 1.8 million albums. Plans called for the introduction of the series through a Time Life Music direct response television campaign followed by a direct mail campaign conducted by Integrity Direct. Thereafter, Time Life was to make the series available to retailers while Integrity distributed it to domestic Christian retail outlets and through its international sales network.

The marketing campaign worked very well. Shout to the Lord, the first double CD volume in the new Songs 4 Worship series, was rolled out late in the company’s fourth-quarter, and by the end of the first quarter of 2001, with sales of over one million copies, it had already attained Platinum certification. That first quarter came on top of a strong year for Integrity, one which saw its sales rise from $45.3 million in 1999 to $51.8 million, a 14.3 percent increase. The company’s net income also rose, from $1.4 million to $1.7 million. Because of its strong cash flow, Integrity was able to continue paying down its outstanding debt, leaving it in a very good position for both further partnering agreements and growth.

By March 2001, Integrity was searching for a bank that would become its financial partner in the company’s long-term growth initiatives. It was also developing strategies for increasing the value of its stock. Clearly, from the success of the first volume in the roll out of the new Songs 4 Worship series, 2001 promised to be even a better year than 2000 had been. Other significant factors would be the strength of Integrity’s e-commerce initiative, integritymusic.com; television direct response campaigns; and the company’s growing continuity club memberships. Combined, in 2000, these marketing outlets delivered a 27 percent increase in consumer-direct sales over the previous year, and were promising to do even better in 2001. Integrity’s robust performance seemed unlikely to diminish, even in a cooling economy.

In the summer of 2001, Integrity took a new direction with the creation of book publishing subsidiary. Formed as Integrity Publisher, Inc., with headquarters in Nashville, Tennessee, its purpose, consistent with Integrity’s primary mission, was to develop and publish Christian book titles. As president and CEO, Byron D. Williamson was put in position to lead the new subsidiary, bringing years of experience in book publishing to the task. According to Coleman, Integrity Incorporated’s CEO, book publishing would begin playing a major role in the parent company’s long-term growth strategy. Plans called for selling titles through Christian retail outlets (CBA stores) and general retail stores (such as Barnes & Noble and Borders) as well as direct-to-consumer channels. The addition of publishing to its business brought Integrity’s status as a Christian-based media-communications company to its fullest extent.

Principal Subsidiaries

Integrity Publishers, Inc.

Principal Competitors

EMI Group plc; Gaylord Entertainment Company; Provident Music Group; Sony Music Entertainment Inc.; Warner Music Group.

Key Dates:

1987:: P. Michael Coleman organizes and incorporates his company as Integrity Music Company.
1993:: The company is reincorporated in Delaware.
1994:: Integrity Music goes public.
1995:: The company changes name to Integrity Incorporated.
1996:: The company begins using television for marketing its music.
1997:: Integrity debuts its program, “Lift Him Up,” aired twice weekly on the Trinity Broadcasting Network.
1999:: Company starts up its online Christian music store but also markets products online through Amazon.com and Crosswalk.com.; in partnership with Marantha! Music and Vineyard Music the company releases first WoW albums.
2000:: Integrity’s annual revenue surpasses $50 million for the first time; the company partners with Time Life Music to create Songs 4 Worship music series.
2001:: Integrity launches Integrity Publishers, Inc., its book publishing subsidiary.